9th Circ. Hears Restored Corinthian Colleges Case

PASADENA, Calif. (CN) – There is nothing new in a revived whistleblower lawsuit against Corinthian Colleges, a lawyer for the now-shuttered education company told a Ninth Circuit panel on Tuesday. The original 2006 lawsuit — filed by realtors Nyoka Lee and Talala Mshuja on behalf of the U.S. government against Corinthian Colleges Inc., along with some of its CEOs and its auditor Ernst & Young — alleged that Corinthian illegally collected billions in federal education funds. The original complaint claimed that the now-defunct Corinthian Colleges, which operated for-profit vocation schools across the country, violated the Higher Education Act by paying out bonuses to recruiters with higher enrollment numbers. The federal law bans that practice, making Title IV loan funds off limits to such institutions. Lee and Mshuja also claimed that Corinthian fired recruiters who failed to meet their recruitment quotas. The lower court dismissed the case in 2009 for lack of jurisdiction under the False Claims Act, finding that Corinthian’s recruiter-compensation program fell within the parameters of the now-eliminated safe harbor provision of education law, which allowed payments to recruiters that are not entirely quota-based. In 2011, the Ninth Circuit unanimously reversed a lower court’s dismissal of the case, giving Lee and Mshuja an opportunity to amend their allegations with more evidence that Corinthian used enrollment quotas as the basis for recruiter compensation. Corinthian collapsed in 2014 and filed for bankruptcy last year. During a hearing Tuesday, Blanca Young, the defense attorney for former Corinthian executives David Moore and Jack Massismino, tried to persuade the Ninth Circuit’s three-judge panel that Lee and Mshuja had previously admitted they had no direct personal knowledge of fraud at the college. “When we asked her how she was compensated, she didn’t know what factors went into the evaluation forms,” Young said of Lee, noting that the original allegations of fraud coincided with Lee’s departure from employment at the college. “This is not a situation where the relators had direct and independent knowledge of the relevant time period.” On top of that, Lee and Mshuja cited a compensation plan in the original complaint that Corinthian used to dictate good performance ratings for increased compensation, Young said. “Nothing that the relators are saying here is new,” she said. Lee’s attorney, Scott Levy said it was “not reasonable” to assert Lee had no firsthand knowledge. “She worked there for five years, so if she didn’t know the basis of her raises, who would you go to to find out?” Levy posited. Lee testified that recruiters got raises for high enrollments, and repeated that numerous times in her deposition, Levy said. The basis for the allegations can be found in what Levy called “flash reports,” which contained the number of leads sent to each recruiter, and their conversion rate for enrollments. These provide evidence that Corinthian used recruitment quotas as a basis for recruiter pay, he said. Lee provided reports through 2005, according to Levy, noting that Corinthian had said they contained proprietary information, were never publicly disclosed, and belonged to Corinthian. “It is beyond dispute they were utilized by the school from 2000 through at least 2013,” Levy said. Defense counsel provided an affidavit confirming the flash reports had never been publicly disclosed and had been maintained as proprietary trade secrets by Corinthian, Levy claimed. Judge William Fletcher pressed Levy on the source of Lee and Mshuja’s knowledge. “My sense is that they did not have any private access to this information,” Fletcher said. Directors at each campus received flash reports weekly, Levy said. “They were in fact given to the recruiters every week, and that’s how Ms. Lee came to possess them in the course and scope of her employment,” he said. Levy added, “The defendants have carefully chained out the chain of custody on these reports as being their documents that they provided to the relator during her employment.” Levy seemed befuddled by the suggestion that Lee and Mshuja did not have direct access to the flash reports. “Clearly the relator produced them in this case,” Levy said. “My understanding of this case is that the problems with Corinthian were not only wide spread and actionable in the sense that Corinthian was doing very bad things, but that they were also very widely known,” Fletcher responded. Fletcher seized upon the issue of attorney’s fees, which the lower court awarded to Corinthian for the entire course of previous litigation. Levy said the court erred in concluding that a settlement in a similar case involving the University of Phoenix spurred Lee and Mshuja to file the original complaint. That settlement came three years after they filed their lawsuit. “The district court’s factual findings are just chronologically not possible,” Levy said. Fletcher said he thinks there could be a basis for awarding attorney’s fees for litigation since Lee and Mshuja filed their first amended complaint, which might be on “shakier ground” than the earlier complaint. Levy returned to the flash reports, which he said had never previously been disclosed. He urged the judges not to “get caught up in this false argument that there is some difference in the allegations in the original complaint and in the amended complaint.”